New York State's "Amazon Tax" Means the End is Nigh

As I filled out my California income tax this year, I laughed when I came upon the "Use Tax" section. Did I buy anything from out-of-state retailers that I owed California sales tax for? Of course I didn't! But whether or not I did, New York state is close to closing that loophole for its residents with the so-called "Amazon Tax."

Normally sales tax has depended on the retailer having a physical presence in a state. Of course, this would exclude Amazon.com, and be a real attraction to people who live in high sales tax states like New York (and California). Naturally states see this as a negative.

The new state budget would remove this loophole, and naturally is strongly supported by in-state retailers. The idea had been abandoned by then-Governor Eliot Spitzer last November, but was since resurrected. The budget was passed last week and is expected to be signed by current Governor David Paterson.

In a press release from January, the Retail Council of New York State said:

"Governor Spitzer’s proposal is a bold and necessary initiative that will help small retailers in New York State who today struggle to compete with Internet giants. These on-line merchants – none of which are based in New York – operate with an unintended competitive advantage fostered by a confusing sales tax landscape."

Of course, it's no longer Governor Spitzer, and it's also difficult to see how something like this isn't going to face legal challenges. In fact, in a 1992 Supreme Court decision, Quill vs. North Dakota, the Supreme Court ruled that out-of-state retailers cannot be required to collect sales tax on purchases sent to states where they did not have a physical presence.

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.

Naturally, it could be argued that for an entity as large as Amazon.com, complexity as indicated above is a bogus argument. However, New York would require tax collections to be made if the entity had $10K in sales within the state. I think that's going to fail the complexity test because a small business could be forced, if this went nationwide, to keep up with the now over 7,000 sales tax laws across the country.

Still, eventually this loophole is going to be closed. And if the above NY proposal passes legal challenges, you can bet that my state, California, will jump on the bandwagon immediately.